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Easing prices a reason to pause — BSP

By Keisha B. Ta-asan, Reporter

THE CONTINUED downward trend of consumer prices is a “good reason” to keep rates unchanged, the Bangko Sentral ng Pilipinas (BSP) chief told reporters on Monday.

BSP Governor Felipe M. Medalla said the Philippine central bank’s policy actions will be largely driven by its inflation target and not by the moves of the US Federal Reserve.

“[With] the most recent numbers, it’s very clear that the inflation rate is declining. Our expectation is, by September or October, inflation is below 4%… It’s a good reason to pause,” he said in mixed English and Filipino.

Headline inflation eased to 6.1% in May from 6.6% in April, data from the local statistics agency showed. However, this marked the 14th straight month that inflation breached the BSP’s 2-4% target range.

Year to date, inflation averaged 7.5%, well above the central bank’s 5.5% forecast for the year.

“On the other hand, the markets may see a further reduction in the difference between the BSP and Fed policy rate as a signal for a weaker peso, which may not be a good thing because inflation is still a problem,” Mr. Medalla said.

“Therefore, we have to be conscious about the interest rate differential but that is not the main driver. The main driver is the domestic inflation picture,” he added.

The US Federal Reserve decided to keep its target interest rate unchanged at 5-5.25% during its June 13-14 meeting, the first pause after it raised borrowing costs by 500 basis points (bps) since March last year.

Meanwhile, the Philippine central bank is widely expected to keep benchmark interest rates steady at 6.25% on Thursday, based on a  BusinessWorld poll of 15 economists conducted last week.  

If realized, this would be the second straight meeting the BSP will leave interest rates untouched. The BSP hiked policy rates by 425 bps from May 2022 to March 2023 to tame inflation.

Mr. Medalla also said the markets are “too optimistic” about when the US central bank will cut policy rates.

“If you listen to the Fed officials, that’s not the case,” he said. “The fact that they have maintained rates and sent a signal that they’re still quite concerned, means we cannot roll out future increases.”

The BSP chief also hopes market players may see that a narrower interest rate differential with the US Federal Reserve does not mean a weaker peso, as this could become self-fulfilling prophecies.

“If the rate differential gets a little bit narrower, it doesn’t necessarily mean a reason for the peso depreciation.

The peso reached a record low of P59 against the dollar in October last year as the greenback surged amid hawkish signals from the Fed.

On Monday, the peso closed at P55.74 versus the dollar, up by 12 centavos from its previous finish, data from the Bankers Association of the Philippines’ website showed.

This is the peso’s strongest close since its P55.725-a-dollar finish on May 23.

In an e-mail interview, ANZ Research economist Debalika Sarkar said the BSP will have to monitor external developments and assess the impact of its previous rate hikes on the economy.

“The ‘hawkish pause’ by the US Fed last week and a still elevated trade deficit in April do not offer much policy flexibility at this stage. We thus do not see a policy pivot by the BSP until the first quarter next year,” she said.

The country’s trade-in-goods balance, or the difference between exports and imports, reached a deficit of $4.53 billion in April. The gap is lower than the revised deficit of $5.1 billion in the previous month and $5.32 billion in the same period last year. It was the slimmest trade gap in two months. The country’s trade balance has been in deficit for almost eight years.

Security Bank Corp. Chief Economist Robert Dan J. Roces said the BSP is expected to keep policy rates steady at 6.25%, but there are still risks to the outlook.

“We estimate inflation to fall within the 2-4% target around September or October of this year, but inflation, peso depreciation, and Fed policy action risks remain tilted to the upside,” he said.

“Thus, the BSP may want to keep interest rates ahead of the curve at some point after this month to keep these risks in check, and continue to signal a ‘hawkish hold’ itself in the meantime,” he added.  

After June 22, the BSP’s next policy meeting is scheduled on Aug. 17.

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